If you’ve watched commercial television for more than about ten minutes in the last few years, you’ll probably have seen loads of ads talking about your credit score. These ads inevitably encourage you to visit a website and pay for a monthly subscription to help you “improve your credit score”.
When talking about financial matters, plenty of people talk about credit scores (or credit ratings) as if they are all-defining numbers that determine your financial future. Interestingly, none of those people preaching about credit scores seem to work for banks or finance companies…
So what exactly is a credit score, and is it as important as the ads on the TV make it out to be? Let us explain.
What is a credit score (or credit rating)?
There are several companies (called credit reference agencies) who claim to be able to tell you your “FREE credit score”, and claim that this magical number determines how likely you are to be accepted for finance. When you visit their websites and input all your personal data, it will spit out a score and then usually a bunch of green ticks and red warning symbols that make it look very serious.
The score is based on a combination of facts, like your credit history and your personal details, and their opinions, based on assumptions they have made from your credit history. The score they come up with is in no way official, nor do banks actually look at this credit score when considering your finance application.
The purpose of all the warning symbols is to try and terrify you into thinking there are problems with your credit score, and that this will affect your chances of being approved for car finance, a mortgage, credit card or other form of loan.
The credit site will helpfully offer advice on how to improve your credit score and monitor it over time, and all you need to do is pay them £15 a month, every month. They will also, super helpfully, provide you with a list of finance products that they suggest may be suitable for you based on your credit score.
From the above paragraph, can you spot the real reasons they want you to “know your credit score”? It’s simple:
- Offering you a FREE credit score is simply a way to get you to sign up for a £15/month subscription that you don’t need.
- They are suggesting a range of finance products that they will get paid a commission on if you take out a loan from the links on their site.
The agency takes your credit history (which is all factual stuff) and applies its own algorithms to it (which are only their opinions) to produce a score that is supposed to give you an indication of your ‘creditworthiness’. The agency then offers you advice on how to improve your score if you take out a monthly subscription, and places advertisements for finance products in front of you (without any guarantee that you will be accepted for them) that it will be paid commissions on if you take them up.
There are three main credit reference agencies in the UK: Experian, Equifax and CallCredit. All three of them will give you a free credit score; Experian rates you out of 999, Equifax scores you out of 700 and CreditCall goes a bit further at 710.
Why did they choose those numbers? Who knows – maybe they think it sounds more complicated than rating you out of 100 and so you’ll think they’re really clever.
The scores from each agency are also calculated differently, so a score of 500/999 (50%) from Experian doesn’t mean you’ll get a score of 350/700 from Equifax or 355/710 from CallCredit. They could be completely different – a bit like how you can get vastly different car insurance quotes from different companies based on the exact same information.
It’s all aimed at selling you stuff, rather than giving you an honest assessment of your financial options. Did you really think these companies were spending vast sums of money on advertising simply to try and help you?
Do finance companies look at your credit score?
No, they don’t. When you apply for finance, the finance company will look at your credit history (which is all factual) as held by the credit reference agencies, but they will also consider a number of other factors, none of which are contained in your credit score. These factors include things like your annual salary, which is important because it determines whether the loan payments will be affordable, and which is not covered by your credit score.
Finance companies will also look at your employment history, your living status (renting, mortgage, living with parents, etc.), your residential status (do you have the right to remain in the UK for the length of the loan?) and so on. Again, this is important information and none of it is included in your credit score.
Once the finance company considers whether you can afford the loan and whether you are likely to pay it all off, they will make a decision on whether to approve the application.
Is a credit score a completely worthless concept?
Although its primary purpose is to help sell you stuff, that doesn’t mean a credit score is worthless. The score is the agency’s analysis of your credit history, making some assumptions and educated guesses based on what’s contained in that history. And some of those assumptions are perfectly reasonable.
For example, every time you make a formal finance application it will be recorded on your credit history. It won’t record whether you were approved or declined for each application, merely that you applied. You may be approved for finance by two different car finance companies but only be buying one car. Obviously, if you subsequently take out a loan then that will show on your history as well.
If you apply for several loans from different lenders in a short space of time, the agency will assume that you keep getting declined and are therefore trying more and more lenders to get a loan. As such, they will downgrade your score each time you apply for a loan. The more loans you apply for, the more it affects your score. A bank will probably think along similar lines when they are reviewing your application, so that aspect of the score is a useful predictor of how your application may be viewed by a lender.
The credit reference agencies all claim that their scores are designed to replicate the way that a finance company will assess your loan application, but they are always working from incomplete information.
Your credit score is not worthless, but it’s also not as important as they like to make out. That’s because they’re trying to sell you stuff off the back of your credit score, so of course they’re going to tell you it’s important. Think of it as a useful guide, but not a bible.
Your credit history IS important
Your credit history is a record of all your finance agreements and applications, so it’s a very important consideration for any lender when reviewing your application. Everything that has happened with your finance agreements is recorded and will either work for you or against you.
If you have missed payments, defaulted on loans or have too many loans all outstanding at any time, a lender is much less likely to consider you a safe bet. On the other hand, if you have a steady track record of taking out loans and then paying them off on time, making all your payments and borrowing within your means, a lender will look more favourably on your application.
Essentially, a lender will give you their own score based on their own criteria. The difference is that, unlike the credit reference agencies, the lender won’t tell you what that score is or how it is calculated.
Make sure your personal information is correct
One of the most important things you can do with your free credit score report is to check that all your personal information is correct. The credit reference agencies get this information from your credit history provided to them by the lenders, but they don’t really check whether it’s 100% accurate and this can have serious implications for you.
If there are any errors in your personal details, it can have a major effect on your ability to get finance. I personally went through this a few years ago, when a bank (HSBC, actually) had provided the credit reference agencies with an incorrect and non-existent address for me. I was trying to close my HSBC credit card and take another card elsewhere, and was very surprised to be declined. It took a few weeks of arguing with Experian and HSBC to get it resolved, and Experian was frankly not interested in helping me out at all, despite the fact that the incorrect information they were holding on me was impacting my ability to obtain finance.
As soon as it was sorted, my bank not only approved the credit card but wanted to increase the limit and offer me other loan products as well! And I did eventually get a written apology from the head of customer services at Experian.
Negative credit history doesn’t last forever
Negative factors on your credit history will undoubtedly hurt your chances of getting any sort of finance, but they will drop off the record after a period of time, so you won’t be penalised forever if you miss a few payments or get yourself into a bit of financial trouble.
However, poor credit history can hurt you for a number of years if you’re not careful, which is why we always tell you to keep your repayment levels comfortably within your means with plenty of breathing room in case of any unexpected trouble.
This article was originally published in April 2018. Last updated May 2020.